The current geopolitical institutional divesting discussion that is garnering national attention is predicated on a fallacy that, for the most part, has gone unchallenged. The commentary regarding divestment, dripping with emotion, urges investors to either avoid investing money in companies that do business in rogue or terrorist nations or, even more to the point, demands that investors take money away from said companies by way of strategic divestment. The fallacy is revealed by a simple review of the following facts:
Fact: When an institutional investor sells a company’s stock it does not result in money being taken away from that company. The companies in question are usually very large multinational organizations. When investors sell or divest of their stock, it is being sold to other investors at no loss to the target company. If a large institutional investor wishes to influence the future direction of a company, the proper course of action is to increase the position held, not reduce it. An investor with no stock has no seat at the bargaining table. If you are serious about politically influencing a company’s behavior, corporate governance initiatives, not divestment, can produce real results.
Fact: It is not likely that strategic divesting will influence company stock prices. In order for that to happen, the activity would have to be well coordinated among large institutional investors and completed within a very short time frame. If that could be accomplished it would probably cause only a short-term, momentum-driven decline in stock prices. And those who are last to divest would be selling into a down market, losing money for the fund. Of course, the price decline would have nothing to do with underlying value, so the most logical buyers would be the company whose shares were being sold and/or hedge funds, meaning many of the shares would be returning to the very funds that originally sold them. The market has a way of correcting for momentum-driven price changes and frequently does it in short order. Strategic divestment would not be an exception.
There is, of course, also the issue of fiduciary responsibility and the dilemma faced by trustees who are directed to arbitrarily divest regardless of the financial consequences. Interestingly enough, that matter seems to only be of interest to those who are, in fact, fiduciaries. Proponents of divestment who have no responsibility or liability seem perfectly happy to see actual fiduciaries expose themselves to risk. This argument, however true, seems to be a non-starter when it comes to today’s divesting discussions.
Even though divesting does nothing to influence the so-called errant companies in question, shouldn’t we do it anyway if it makes us look or feel good? The answer is that besides the fiduciary pitfalls, there are plenty of reasons we should not divest — not the usual fiscal arguments but rather reasons that have to do with being patriots who are concerned about the future welfare and safety of our country and our men and women in uniform. Those reasons include:
Third World countries are in dire need of infrastructure and economic development. Getting a taste of what can be rather than what is and being exposed to people from developed countries can have a very positive impact on the attitude of the general population. Terrorists, on the other hand, thrive in an environment where the general population is deprived. Keeping the masses from having basics such as water, electricity, telecommunications, roads, and health-care facilities plays right into the hands of the terrorist.
Multinational companies concerned about their reputations are the companies we should want to see operating in the sanctioned nations. Historically, most of them go the extra mile to be seen as a force for good rather than a force for evil. Divesting exposes such companies to risks to their reputations to which the good ones would rather not be exposed. Get them to pull out through divesting pressure and what is left? Companies that don’t care beyond their profit margins.
Many of the multinational companies in question are domiciled in our allied countries. Denigrating such companies is tantamount to denigrating their headquarter countries. Divesting alienates current and prospective allies at a time when we need all the political friends that we can find worldwide.
Multinational companies operating in sanctioned nations can be valuable sources of information that can be critical to the potential success of U.S. political and military operations. If divesting alienates the companies, the rhetorical question is: How cooperative should we expect them to be in assisting our intelligence-gathering networks and our armed forces in times of need?
The long-term economic viability of the United States is largely dependent on our place in the global economy. Divesting smacks of the isolationist and protectionist policies that have never worked in the past and that will not work now or in the future. Such policies, however, will go a long way toward relegating the U.S. to a secondary economic influence in the world marketplace.
Complicating pension fund investment, President Bush on Dec. 31 signed into law S. 2271, the Sudan Accountability and Divestment Act of 2007,which “purports to authorize state and local governments to divest from companies” in Sudan, according to a White House statement, which added, “as the Constitution vests the exclusive authority to conduct foreign relations with the federal government, the executive branch shall construe and enforce this legislation in a manner that does not conflict with that authority.”
Divest and the terrorists win.
Cody Ferguson is a former trustee of the Los Angeles County Employees Retirement Association, Pasadena, with 26 years of experience on the board dating to 1978. He was very involved in researching and writing LACERA’s existing policies related to institutional strategic divestment. He was a career firefighter for the county.